Care About the Economy? Ignore the Goldman Sachs Testimony, and Watch the Fiscal Responsibility Commission Instead
Filed Under (U.S. Fiscal Policy) by Jeffrey Brown on Apr 28, 2010
While the Goldman Sachs testimony yesterday made all the political headlines yesterday, there was a second event occurring simultaneously that is much more important for our long-term economic security. You see, despite all the rhetoric about financial regulatory reform, the Goldman Sachs hearings are really all about the past.
The bigger story is about our future. President Obama formally kicked-off of the “National Commission on Fiscal Responsibility.”
This Commission has the most difficult and important jobs in Washington – to figure out how to restore U.S. fiscal policy to something akin to a sustainable course. It won’t be easy. After 50+ years of total government spending comprising about 1/5 of the U.S. economy, the three entitlement programs – Medicare, Medicaid and Social Security – are projected – all by themselves – to exceed this share of the economy in the lifetime our today’s schoolchildren. Throw in continued expenditures on all other functions of government – national defense, homeland security, environmental protection, education, the court system, and more – government spending is projected to consume an ever larger share of our economy. This, in turn, has the potential to raise interest rates, crowd-out private investment, and thus reduce our rate of economic growth.
The President was careful not to take anything off the table yesterday. That is important because this is not going to be an easy problem to solve. At the end of the day, there are only two solutions to our fiscal problem.
Solution 1: Raise more revenue. In political terms, this means raising taxes. I doubt that the Republican members of the Commission will be fond of this.
Solution 2: Cut spending. In political terms, this means reducing the growth rate and/or level of benefits from “sacred cow” programs with vocal constituencies – such as seniors. Democrats proved in 2005 that they are unwilling to cut benefits. And many Republican members of the House sought to “solve” the problem through free lunch gimmickry, arguing that personal accounts (which I support, albeit for different reasons) would generate high enough returns that no benefit cuts would be needed.
Where does that leave the Commission? I see it most likely pursuing one of three possible outcomes.
Outcome 1: The D’s and R’s on the Commission are unable to find enough common ground, and thus the Commission issues a final report that offers a series of options, each with proponents and dissenters. In other words, partisanship.
Outcome 2: The Commission agrees they need to have at least some options that most members agree to. And, caving to political pressure, they throw intellectual honesty out the window, and use a combination of both time-tested and brand new gimmicks to make it seem like the problem can be fixed without serious revenue increases or spending cuts.
Outcome 3: The Commission takes a brave political stand by pointing out the extraordinarily difficult fiscal challenges ahead of us, proposes politically earth-shattering reforms, and then disbands and watches its proposals wither and die in the backrooms of Congressional committees.
Given the composition of the committee (see list here), I am optimistic that option 2 will be discarded. But I think 1 and 3 are equally likely.
If there is hope for real reform coming out of this Commission, it will be because the Commission actually includes many sitting members of Congress who control the key committees. In this important sense, this Commission has more in common with the 1983 Greenspan Commission, which led to politically difficult Social Security reforms being passed by Congress, than with the 2001 President’s Commission to Strengthen Social Security, which had no members of Congress and which saw its recommendations soundly ignored.
I hope my skepticism is mis-placed. I sincerely hope this Commission comes up with good options, and that those in power listen. If this happens, the long-term implications for “good” are far greater than 99% of all other economic news …